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Business and

Income Taxes Division – Compliance Fiscal Year End

2016 Report

Compiled by Jill Hamilton, Management Analyst

11/23/2016 Compliance and Collections Report FYE2016 2

Table of Contents

Introduction Overview of Business and Income Taxes Division .......................... 3

Compliance Compliance Results ......................................................................... 4 Audit Collection Comparison by Fiscal Year .... ………………………5 Office and Field Audit Collections Breakout .... ………………………6

Income and Withholding

Individual Income Tax ........................................................... ………7 Pass-Through Entities ...................................................................... 8

Business Tax and Valuation Corporate Income Tax...................................................................... 9 Miscellaneous Tax.......................................................................... 10 Natural Resources Tax................................................................... 11 Industrial and Centrally Assessed Property .............................. 12-13

Administrative Research Team Summary of Responsibilities .......................................................... 14

Fraud Prevention ........................................................................ 15


Introduction

The Business and Income Taxes Division (BITD) oversees audits and verifies compliance with Montana laws for all state taxes administered by the department, specific programs assigned to the department, and appraisals and assessments of industrial and centrally assessed property.

The purpose of this report is to provide summary information on the main performance measures currently tracked by the BITD. The performance measures give a glimpse of the amount of work and accomplishments achieved by the division. To be successful in meeting our mission, all of the division resources must be focused on the common goals of ensuring compliance and administering tax laws fairly. The outstanding effort demonstrated by the division employees has allowed our division to produce impressive results and meet our fiscal goals.

BITD consists of two bureaus: Business Tax and Valuation (BTV) and Income and Withholding Taxes (IWT) with the support of one administrative unit.

Throughout the report several common performance measures are used. These common measures are defined as follows:

Audits: Audit activities determine the correct tax liability for individuals and business entities in accordance with the Montana laws. These activities include the detailed examination of tax returns and supporting documents. Office audits, also referred to as non-complex audits, can generally be completed at the auditor’s desk and involve simple line adjustments on a return or the verification of tax information. Field audits, also referred to as complex audits, most often take place at the taxpayer’s place of business or Revenue office and may involve in-depth reconciliation of receipts, income, and cash flow to multiple, related entities.

Appraisals: Appraisals are conducted periodically to ensure that market value is achieved in accordance with Montana laws. Work Items: A work item is a task that is tracked by Gentax and must be completed. Work items can be assigned to specific users, or put in a work item queue by the system. Users may search and work them accordingly. Work items can be manually created or automatically generated through Gentax during return (batch) processing for the majority of all tax types in the system.


Compliance Results

Summary of Compliance Activities

Fiscal Year End 2016 July 1, 2015 – June 30, 2016

Compliance Activities First Half Second Half Total____ Individual Income Tax $ 27,099,240 $ 26,169,290 $ 53,268,530 Corporate Income Tax $ 4,343,020 $ 8,965,470 $ 13,308,490 Natural Resource Tax $ 3,912,010 $ 958,810 $ 4,870,820 Miscellaneous Taxes $ 1,271,800 $ 1,113,000 $ 2,384,800 Pass-Through Business Taxes2 $ 993,270 $ 1,386,850 $ 2,380,120 Centrally Assessed/Industrial $ 0 $ 0 $ 0 Property3 Total Audit Collections $37,619,3401 $38,593,4201 $76,212,7601

Summary of Compliance Activities

Fiscal Year End 2015 July 1, 2014 – June 30, 2015

Compliance Activities First Half Second Half Total____ Individual Income Tax $ 21,331,825 $ 23,641,190 $ 44,973,015 Corporate Income Tax $ 23,498,745 $ 5,276,745 $ 28,775,490 Natural Resource Tax $ 4,024,650 $ 1,250,010 $ 5,274,660 Miscellaneous Taxes $ 3,211,925 $ 1,092,280 $ 4,304,205 Pass-Through Business Taxes2 $ 1,390,550 $ 837,655 $ 2,228,205 Centrally Assessed/Industrial $ 8,139,837 $ 0 $ 8,139,837 Property3 Total Audit Collections $61,597,5321 $32,097,8801 $93,695,4121

1GenTax Discovery collections are included in the Audit Collection total. 2All individual collections attributed to pass-through compliance activities are included in the Individual Income Tax total. Further note: Activities associated with delinquent account receivables of taxes owed are also included in the Audit Collection total. 3Audit collections are a reflection of the audit work done, however collections may be paid to the State or County.


Audit Collection Comparison by Fiscal Year

The following line chart compares FY16 audit activities with those of the five prior fiscal years. Detailed information of audit collections by tax type for FY16 is shown in the following pages.

Total Audit Collections: $76.2 million

$59.0 $57.6

$77.5$79.1

$66.9

$63.0 $61.2 $60.5

$93.7

$76.2

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Mil

lio

ns

Business and Income Taxes Division Compliance Collections by Fiscal Year

Total Compliance Collections


Office Audit Collections: $60.9 million

Field Audit Collections: $15.3 million


Individual Income and Withholding Taxes

In Montana, the individual income tax has a graduated rate structure with rates ranging from 1% to 6.9% of taxable income. This is a “progressive” tax because taxpayers with higher incomes pay a higher percentage of their income. Not only are residents of Montana required to file, but part-year residents and non-residents with income from Montana sources are required to file an individual income tax return. Income tax revenues are collected primarily through employer withholding, periodic estimated tax payments, and payments made when the return is filed. In addition, audit collections are included in the overall income tax revenue and are collected through audit and bill payments.

Individual income tax audit collections for fiscal year 2016 totaled $53.3 million.


Pass-Through Entities

Increasingly, in Montana and nationwide, business and investment activities are being conducted by pass-through entities. The most common type of pass-through entity today is the limited liability company or LLC. Other types of pass-through entities are partnerships, S corporations, fiduciaries, and disregarded entities. Income and expenses are reported in the tax returns of the owners. These owners can be corporations, individuals, other pass-through entities, or a mix of all of them. Due to the complex nature of pass-through entities, they often represent a challenge for tax administration. The pass-through audit program is a combination of office and field audits at both the business and individual level. In the chart below, individual and business tax collections are represented. Pass-through entity tax audit collections for fiscal year 2016 totaled $6.9 million. (Partnership and S-Corporation collections totaled $2.8 million plus the $4.1 million represented by the shareholders individual audit collections)

Note: Individual audit collections are counted in both the individual income tax audit collection chart and the pass-through entity tax audit collection chart.


Corporate Income Tax

Montana’s corporate income tax is a franchise tax levied on corporations for “the privilege of carrying on business in this state.” The tax is levied at the rate of 6.75% on net income earned in Montana. Corporations conducting business that is taxable both within and outside the state (multi-state corporations) are required to allocate income to Montana based on an equally-weighted, three-factor apportionment formula, where sales, property, and payroll are the three factors. Corporation tax audit collections for fiscal year 2016 totaled $13.3 million.


Miscellaneous Taxes

Various miscellaneous taxes are imposed in Montana including excise taxes, wholesale taxes on distributors, cigarette taxes from internet sales, and special assessments. The BITD tracks collections on over 15 different miscellaneous taxes. Several miscellaneous taxes that make up a significant part of the division’s audit collections are:

Retail Telecommunications Excise Tax

Electrical Energy Tax Wholesale Energy Transaction Tax Public Service Commission Tax Consumer Counsel Tax TDD Telecommunications Service

Fee

Statewide 911 Emergency Telephone System Fee

Lodging Facilities Use Tax Rental Vehicle Tax Cigarette/Tobacco Products Tax Nursing Facilities Bed Tax Abandoned Property Contractor’s Gross Receipts

Miscellaneous tax audit collections for fiscal year 2016 totaled $2.4 million.

Natural Resource Taxes

Generally, natural resource taxes may be categorized as either severance/license taxes, or some form of ad valorem taxes. Each of the different natural resource taxes in Montana vary by certain characteristics including tax rates, filing requirements, disposition of the tax, and production tax incentives. Natural resource tax collection is largely made of up of the oil and natural gas production tax, however other sources of significant revenue are:

Coal severance tax Coal gross proceeds tax Metalliferous mines license tax Metal mines gross proceeds tax Bentonite production tax Miscellaneous mines net proceeds

tax

Resource indemnity and groundwater assessment tax

Cement and gypsum tax Federal mineral royalties

Natural resource tax audit collections for fiscal year 2016 totaled $4.9 million.


Industrial and Centrally Assessed Property Industrial Property Appraisals:

Responsible for the appraisal and assessment of approximately 1,900 parcels of taxable property located across the State of Montana;

Includes large companies within the grain industry, mining, wood products, and oil refining, plus many smaller commercial manufacturing companies and companies that have established locations in more than one county in the state.

2016 Market Value: $6.4 billion



Utility Property Appraisals:

Responsible for the appraisal and assessment of approximately 330 public utility type properties located across the state or the country.

State of Montana has the responsibility to assess for ad valorem tax purposes certain properties or portions of properties of large corporations that operate across county and state lines.

Includes properties of railroads, utilities, pipelines, airlines, water transportation companies, railroad car companies, electric cooperatives, communications companies, and other public service companies.




Administrative Research Team The administrative team is responsible for a wide variety of duties that span across the two bureaus. Several of these duties include:

Tracking/documentation of the Statement of Account (SOA) objections, suggested replies, correspondence and legal referrals

Front desk responsibilities – greeting/assisting taxpayers

Management of state vehicles – tracking mileage, assign/manage the appointments to reserve the vehicles

Scan and attach information from taxpayer to Gentax

Web page maintenance: newsletters, division updates

Transcript Delivery System (TDS) Requests – pulling data from Federal data base, logging and providing info. to auditors

Complete requested tax certificates for all business types

Assist taxpayers with requests for W-2s from previous years

Assist the processing division during income tax season researching refunds that were returned due to bad addresses and return correction work items.

General administrative activities.


Fraud Prevention Fraudulent activity including ID theft is one of the fastest growing crimes in America. Every year more emphasis is put on mitigating fraud and decreasing the revenue lost to fraud. There are specific Gentax fraud tools to assist the BITD in detecting fraud up front before the returns are processed and refunds are issued. The Gentax Data Exchange (DEX) manager is an electronic, automatic, and secure exchange of data with other states. Currently there are 15 participating states including Montana (AL, AR, CA, CO, GA, ID, IL, LA, MN, MI, ND, NM, UT, WI, WV). Before a return is processed, built-in rules or edits are automatically verified up front and any identified errors will suspend the return and require an auditor to correct it. Once the return is cleared, a second level of verification takes place before a refund is issued. The Gentax Refunds manager is used to identify potential fraudulent refunds before they are sent out to taxpayers. Refunds may be flagged for suspicious activity pertaining to potential fraudulent information. The Suspicious Filer Exchange Program is sponsored by the FTA (Federation of Tax Administrators) and assists states in identifying and stopping fraudulent state refunds. Currently there are 41 participating states including Montana.

Verified Fraud in Montana Number of Fraud

Accounts

Dollar Amount Prevented from being

Refunded

TY 2009 64 $77,000

TY 2010 185 $100,000

TY 2011 142 $227,000

TY 2012 972 $776,000

TY 2013 1,273 $1,519,000

TY 2014 1,728 $1,884,300

TY 2015 (through Aug. 31,

2016)

143 $165,080

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